A presidential advisory panel is considering a plan to drastically cut the popular mortgage-interest deduction on home loans, a move that could prove to be a financial hardship for many Bay Area homeowners.

The proposal to set a cap for mortgage-interest deductions on tax returns was discussed earlier this week by President Bush’s Advisory Panel on Federal Tax Reform. Under current tax law, a married couple filing jointly can claim a deduction for mortgage interest paid on the first $1 million of a home loan.

The cap being considered by the panel would vary in different parts of the country. Except Hawaii, the highest level of $312,895 would apply in the Bay Area, where the median home price for a detached home is $730,360, according to the California Association of Realtors. Mortgage interest paid above the cap would no longer be tax-deductible under the panel’s plan.

But before it could become a reality, the proposal would first have to become a bill and be passed by Congress — something observers say is unlikely to happen.

Under the proposal, income-tax deductions for interest paid on home mortgages would be tied to a cap linked to the maximum mortgage insured by the Federal Housing Administration. It’s likely a cap would include provisions to either grandfather or transition in homeowners with existing mortgages, panel spokeswoman Tara Bradshaw said Thursday.

If the cap becomes law, the amount of tax benefits tied to mortgage interest would drop sharply in the Bay Area, where housing costs are among the highest in the nation. Take a homeowner who buys that $730,360 median-priced, detached home, putting 20 percent down and taking out a 6 percent loan on the $584,288 balance.

Under existing tax laws, the homeowner would be able to claim a $34,862.09 mortgage-interest deduction in the first year, said Cory Reid, president of the East Bay chapter of the California Association of Mortgage Brokers. Under the proposed cap, the homeowner would be able to claim only $18,986.95.

That deduction difference of $15,875.14 would cost you $5,556.30 if you were in the 35 percent tax bracket or $3,968.79 if you were in the 25 percent tax bracket.

It’s dramatic,” said Reid, adding that the mortgage-interest deduction “is something a lot of people rely on.”

Nationally, the median price for a single-family home is $220,000, according to the National Association of Realtors — a number far below the Bay Area’s median.

Lowering the cap is not a good idea, Reid said.

“That would be crazy. It would be very detrimental to consumers nationwide,” he said. “At first pass, it simply appears there is nothing good for consumers.”

A cap “may affect the overall decision to buy a home because of the reduction of the offset,” he said.

Reid cautioned that people should not make the tax deduction for mortgage interest their main deciding factor in whether they buy a home.

Advisory panel spokeswoman Bradshaw said the current tax laws for mortgage-interest deductions are “ineffective” and not in line with average housing costs nationwide.

“They encourage large houses and subsidize vacation homes and encourage families to borrow against their home and save less,” she said. “The proposal would encourage homeownership — not bigger homes or second homes.”

Still, getting a cap passed in Congress will be no easy task.

“The concept of rolling back this deduction … is something that has not been very well received in Congress,” said David Sandretti, communications director for Sen. Barbara Boxer, D-Calif.

“Sen. Boxer has got some very serious concerns about this, particularly with what California housing costs are vis-a-vis the rest of the country. She is very troubled by this and is not supportive of a cap. The bottom line for her is that this would discourage home ownership in this country, and that is something we should encourage.”

Reid doubts the proposal will become law.

Consumer groups and lobbyists, he said, will “just smash that. I don’t think it has a chance of passing. It’s too anti-consumer.”

The proposal could be taken up Tuesday by the advisory panel when it considers more specific recommendations. The panel will then turn in formal proposals on Nov. 1 to Treasury Secretary John Snow, who will them make recommendations to President Bush.

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